Metallurgical Coal

Metallurgical coal

Seasmus French

Seamus French
CEO

$1,189m

OPERATING PROFIT

(2010: $780m)

11%

SHARE OF GROUP OPERATING PROFIT

(2010: 8%)

$1,577m

EBITDA

(2010: $1,134m)

Group strategy actions

Investing - in world class assets in the most attractive commodities

In December 2011, we took an important step in our investment programme to triple our hard coking production by 2020 by approving the $1.7 billion, 5 Mtpa Grosvenor Phase 1 project.

Organising – efficiently and effectively

Successful mitigation actions to recover from lost volumes following exceptional heavy rain in late 2010 and early 2011, combined with asset optimisation improvements, led to record run-of-mine production at the open cut operations.

Operating – safely, sustainably and responsibly

In 2011, Metallurgical Coal recorded a 24% fall in its lost time injury frequency rate, and there were no deaths at any of its operations.

Employing – the best people

Initiatives such as our employees' passionate commitment to rebuilding the local community's infrastructure following the floods, working with government to bring fresh talent into the business, and developing sector leading operations management systems are examples of a company that is really making a difference.

Financial highlights

US$ million (unless otherwise stated) 2011 2010(1)
Operating profit 1,189 780
EBITDA 1,577 1,134
Net operating assets 4,692 4,332
Capital expenditure 695 235
Share of Group operating profit 11% 8%
Share of Group net operating assets 11% 10%
  • (1) Following a strategic review during the year, Peace River Coal is now managed as part of the Metallurgical Coal business unit and accordingly is presented as part of the Metallurgical Coal segment. It was previously reported within the Other Mining and Industrial reporting segment. Comparatives have been reclassified to align with current year presentation.

BUSINESS OVERVIEW

Anglo American is Australia's second largest metallurgical coal producer and third largest global exporter of metallurgical coal.

Our coal operations in Australia are based on the east coast, from where Metallurgical Coal serves a range of customers throughout Asia and the Indian sub-continent, Europe and South America. Our metallurgical coal operation in Canada, Peace River Coal, mainly serves customers in Europe, Japan and South America.

Metallurgical Coal operates six mines in Australia: one wholly owned, and five in which it has a controlling interest. Five of the mines are located in Queensland's Bowen Basin: Moranbah North (metallurgical coal), Capcoal (metallurgical and thermal coal), Foxleigh (metallurgical coal), Dawson (metallurgical and thermal coal) and Callide (thermal coal). Drayton mine (thermal coal) is in the Hunter Valley, New South Wales. All of the mines are in well established locations and have direct access to rail and port facilities at Dalrymple Bay and Gladstone in Queensland and Newcastle in New South Wales.

Moranbah North is an underground longwall mining operation with a mining lease covering 100 km2. Coal is mined from the Goonyella Middle Seam, approximately 200 metres below the surface. The mine produces around 4.5 Mt (attributable) of high fluidity, hard coking coal for steel manufacturing. Production in 2011, however, was 2.5 Mt (attributable), primarily due to the effect that flooding had on the site early in the year. Methane-rich seam gas is supplied to a power station at Moranbah North, thereby reducing the mine's carbon dioxide equivalent (CO2e) emissions by around 1.3 Mtpa.

Capcoal operates two underground mines and an open cut mine. Together, they produced around 5.0 Mt (attributable) of hard coking coal, pulverised coal injection (PCI) and thermal coal in 2011. Capcoal also supplies methane-rich seam gas to Energy Developments Limited's power station, contributing to Queensland's power grid, while reducing the mine's CO2e emissions by 0.8 Mt.

Foxleigh is an open cut operation and produced 1.4 Mt (attributable) of high quality PCI coal in 2011. The mine is engaged in an asset optimisation process to increase production. Dawson is an open cut operation, which in 2011, produced 7.7 Mt in total (3.9 Mt attributable) of coking and thermal coal.

Peace River Coal is an open cut operation, which produced 0.9 Mt of metallurgical coal in the year. In 2011, Anglo American acquired the remaining minority interests in Peace River Coal in British Columbia, Canada. Currently the Trend mine is operational with significant growth opportunities being explored for the complex.

Metallurgical Coal owns an effective 23% interest in the Jellinbah and Lake Vermont mines in Queensland; both are metallurgical coal producers.

In 2011, Metallurgical Coal's mines produced an attributable 14.2 Mt of metallurgical coal, all for export, and 13.4 Mt of thermal coal, of which 46% was exported.

Metallurgical Coal's resource base totals some 3.6 billion tonnes of coal. This includes high quality greenfield metallurgical coal resources close to existing infrastructure.

INDUSTRY OVERVIEW

Metallurgical coal, composed of coking coal and PCI coal, is a key raw material for blast furnace steel production. Blast furnace-produced hot metal represents approximately 70% of global crude steel production(1), making metallurgical coal an important raw material.

Global metallurgical coal supply of around 1 billion tonnes is mainly consumed in the country of origin. China is the biggest consumer of metallurgical coal, consuming approximately 700 Mt in 2010(2). As a result of its substantial domestic production, however, China only relies on imported coal for approximately 8% of its total requirement. In 2011, the international seaborne metallurgical coal market comprised some 250 Mt, the major destinations being Japan, China, India, South Korea, Brazil and Taiwan, as well as many countries in Europe. Historically, Australia has supplied two-thirds of the seaborne metallurgical coal market; flood related constraints, however, limited the country's global contribution to below 60% in 2011.

The market has traditionally comprised predominantly long term annually priced contracts. A shift to shorter term pricing in 2011, however, saw the majority of contracts priced on a quarterly basis, with a growing volume being priced monthly.

  • (1) World Steel association, Steel Statistical Yearbook, July 2011.
  • (2) CRU Metallurgical Coke Outlook - November 2011.

STRATEGY AND GROWTH

Emerging markets, particularly in the Asia-Pacific region, are likely to remain the driving force behind metallurgical coal demand, both in the short and long term. In light of this, Metallurgical Coal's strategy is to significantly increase the value of the business by optimising existing operations and to develop new operations to supply mainly high margin export metallurgical coal. Four specific programmes have been developed to implement this strategy:

  • A structured programme of asset optimisation is designed to deliver industry-best operational performance over the existing asset base.
  • An attractive and well developed organic growth pipeline aims to triple high value metallurgical coal production over the next decade. Growth opportunities include several advanced projects at the feasibility or pre-feasibility stage, as well as a long pipeline of additional opportunities. The high quality hard coking coal advanced opportunities include the Grosvenor Phase 1 and Phase 2 and Moranbah South projects in Queensland and the Roman expansion project in British Columbia. The export thermal advanced projects include Drayton South and Dartbrook in New South Wales. Anglo American has also received 02 preferred respondent status of 30 Mtpa dedicated port capacity at Abbot Point in Queensland, with several other logistics options secured, such as dedicated trains, to underpin its industry leading growth plans.
  • We are exiting from low margin domestic thermal coal production. The operations at Drayton in New South Wales have been upgraded and, since September 2011, all production has been converted to higher margin export products. A process is under way to divest the Callide mine. Once Callide has been disposed of, Metallurgical Coal will be solely an export business.
  • In line with increasing demand from the steelmaking industry in both existing and emerging markets, Metallurgical Coal is realising increased value from developing superior specialised product offerings tailored to individual customers in the steel sector.

Methane is highly concentrated at many of our metallurgical coal mines in Australia. Our coal business in Australia has invested more than $120 million over the last five years to abate 8 Mt of emissions using available commercial scale technologies.

These include initiatives such as the Moranbah North and Capcoal power stations. By capturing methane, which would otherwise be vented, these power stations prevent 2.1 Mt of CO2e emissions from entering the atmosphere each year and generate 75 MW of electricity (equivalent to taking about 580,000 cars off the road).

Furthermore, Metallurgical Coal is a cornerstone investor in Australia-based MBD Energy, which is expected to commence trials of its leading-edge carbon capture and conversion technology, using algal synthesisers, at three of Australia's biggest greenhouse gas-emitting, coal fired power plants.

Metallurgical coal growth

FINANCIAL OVERVIEW

Metallurgical Coal's operating profit increased by 52% to a record $1,189 million. Higher realised export selling prices and a strong production recovery in the second half of the year more than offset the impact of rain on production and a strong Australian dollar. Production at the Queensland operations was affected by heavy rainfall and subsequent flooding in late 2010 and in the first quarter of 2011, which resulted in force majeure declarations being in effect until June 2011. Export metallurgical coal production decreased by 9% compared to the prior year, primarily as a result of the impact of these adverse weather conditions, although the business made a strong recovery in the second half of the year, particularly at the open cut operations. Unit costs increased as a result of lower production, the additional costs associated with flood recovery initiatives, and the strong Australian dollar.

Markets

Anglo American weighted average achieved FOB price ($/tonne) 2011 2010
Export metallurgical coal 251 177
Export thermal coal 101 87
Domestic thermal coal 34 33
Attributable sales volumes ('000 tonnes) 2011 2010
Export metallurgical coal 13,983 15,729
Export thermal coal 6,274 6,384
Domestic thermal coal 7,455 8,342

Despite short term macro-economic uncertainties and monetary tightening measures in China impacting steel production in the second half of the year, metallurgical coal supply shortages due to wet weather and industrial disruptionsresulted in a strong metallurgical coal market for most of 2011. Record quarterly prices were settled across all metallurgical coal categories in the April to June 2011 quarter, resulting in overall 2011 average prices being well above historical levels.

Anglo American led the industry's metallurgical coal quarterly price settlements in three consecutive quarters during 2011, providing a well-supported market reference for premium hard coking coals and PCI coals. The majority of Anglo American's metallurgical coal sales were placed against term contracts with quarterly negotiated price settlements.

Operating performance

Attributable production ('000 tonnes) 2011 2010
Export metallurgical coal 14,190 15,570
Thermal coal 13,426 14,461

Production declined following Queensland's record rainfall, with floods affecting both the open cut and underground operations. As a consequence, sales of high quality metallurgical coal decreased by 11% to 14.0 Mt for the year. However, successful mitigation actions taken early in the year to recover lost volumes and ongoing asset optimisation improvements led to record run-of-mine production at the open cut operations. For the second half of the year, all metallurgical coal open cut operations set new production records, demonstrating the strong effort to recover from the flooding events. A mitigation programme aimed at reducing the impact of rain at the open cut operations has been completed, which will significantly reduce the impact of such events in the future.

At the underground operations, productivity improvement was a major focus during the year, with the implementation of a structured internal programme to raise the longwall operations' productivity to benchmark levels. The programme also involved partnership agreements with equipment suppliers to establish best-in-class practices. New weekly production records have since been set at both longwall underground operations. Scheduled longwall moves in the second half of the year reduced production below prior year levels, however, a partial drift failure at Moranbah delayed the restart of the longwall following its move.

Optimisation of the entire coal supply chain through streamlined logistics management and new product offerings to customers through blending, continue to deliver significant benefits and value to our customers.

Projects

In December 2011, the development of the $1.7 billion, 5 Mtpa Grosvenor Phase 1 metallurgical coal project was approved. This represents the first phase of our investment programme in Australia to grow our high margin, hard coking coal production. Grosvenor's first development coal will be produced in 2013, with full commercial production expected in 2016. Advanced stage project studies continue at Moranbah South, Dartbrook and Drayton South in Australia, and also at Roman in Canada to achieve our objective of tripling hard coking coal production by 2020 to meet expected growth in demand for both metallurgical and thermal coal. Negotiations continue on the proposed divestment of the Callide mine as part of Metallurgical Coal's strategy to exit the low margin domestic thermal coal business. Callide primarily supplies domestic power stations in Queensland, producing 8.0 Mt of thermal coal in 2011, with expansion potential from its resource base of more than 800 million tonnes.

Outlook

Metallurgical Coal will be a 100% exporter, with a focus on high margin hard coking coal growth, following the planned divestment of Callide. Sustained productivity increases at both the underground and open cut operations, together with the industry leading expansion plans already announced, will position Anglo American as a leading producer of premium products in a highly attractive market.

In the short term, continuing global economic uncertainty is expected to challenge the recovery of the steel market during 2012. Measures to control inflation in emerging economies such as China and India have restrained economic growth. In addition, an uncertain policy response to tackle the European sovereign debt crisis has also weakened economic activity. Despite the short term macro-economic uncertainty, the medium to long term prospects for metallurgical coal demand remain robust as China and India continue to grow strongly.

In the absence of weather related disruptions, Australian supply is expected to continue to recover to pre-flooding levels. However, persistent industrial disruptions may impact the full recovery of supply in Australia.